Collaborate to Innovate

by By Kurt Kuehn On Jan 1, 2006

If there's a single word that sums up the direction of business innovation and supply chain midway through the first decade of the 21st century, it might well be collaboration. It's a theme that's resonated over the past two years at four global-economy and supply chain thought leadership conferences sponsored by UPS and Harvard Business School Publishing. These "Longitudes" conferences have created a dialogue among many of the world's leading supply chain practitioners, renowned academic researchers and world leaders engaged in shaping the global economy. To date, the conferences have been held in the United States, Europe and most recently, this fall, in China.

At Longitudes Shanghai, Tom Friedman, best-selling author of The World is Flat, observed that "in today's interconnected world, economic power increasingly resides with individuals. That includes three billion new players from China, India and the former Soviet Union."

Many enterprising individuals already use Web and other information sharing technologies to work in unprecedented, collaborative ways with a variety of experts, in a variety of fields in a variety of places on the planet. In product design, for example, the wave of the future is exemplified by the recent announcement of a new school at Stanford University that will teach multidisciplinary design strategy by bringing together students from business, engineering, medicine, management and the social sciences to work together to solve problems. Nations are also getting into the act, collaborating as specialists in various aspects of product and services development and at a variety of points in the supply chain.

China has become a manufacturing Mecca, India is becoming an information technology and financial services hub, Taiwan is a technology design and marketing center, Ireland has morphed into a software development hotbed, and Japan and the United States continue to lead in customer-centric design. What do these trends toward specialization and collaboration mean to the supply and demand chain executive?

It's increasingly taking us into a world of synchronized commerce, a world where the flows of goods, information and funds can be combined and choreographed to create value. In such a world, according to the supply chain leaders who've participated in the Longitudes conferences, supply chain pros can seize their own new opportunities to innovate by creating agile supply chains that are closely matched to the business plan. Already, many high-impact, flexible supply chains cross a number of national borders to match the best suppliers with individual orders. As Longitudes participant Bob Moffat, senior vice president of integrated supply chain for IBM, has put it, "It's no longer about taking advantage of economies of scale, but more about taking advantage of economies of expertise."

The Longitudes experts agreed the supply chain could profoundly influence each of these priorities. Let's look at them one by one.

1. Reaching New Markets

A Longitudes Shanghai takeaway heard from several supply chain leaders was the importance of partnering to build local supply chain expertise in developing nations like China. The Walt Disney Co. has done that in opening its first Asian theme park in Hong Kong. Larry Wilk, Hong Kong Disneyland vice president of logistics and operations, explained that great care was taken to match supply chain strategy to the business plan for Asia. "We wanted to create a great customer experience from the outset," Wilk explained. "To do that, we relied on partnering to keep the supply chain invisible, to increase speed and to decrease the risk of disruption."

Over the long term, Hong Kong Disneyland intends to hire and train local people throughout its management functions, including supply chain. The company sends its Hong Kong employees to other Disney facilities around the world for three to six months to learn the business. The challenge, as McKinsey research has documented, is the shortage of immediately available supply chain talent. McKinsey data indicate that 75,000 supply chain managers will be needed in China alone over the next five years, but only 3,000 are now available.

So a key Disney new-market objective in Asia is patient growth. The company intends to hire and operate locally to become part of the region's cultural fabric. To do so, it must ensure growth plans don't move faster than supply chain and organizational expertise allow.

2. Enhancing the Customer Experience

Whether it's serving new customers in new markets like Hong Kong Disneyland, or serving existing customers in traditional markets, the essential foundation of supply chain management lies in a deep understanding of customer needs, reiterates Dr. Hau Lee, professor of operations, information and technology at The Stanford University graduate school of business.

At Longitudes Shanghai, Lee cited the China supply chain approach of Astec, a marketer of power supplies to original equipment manufacturers in the computer and telecom industries. Like Disneyland Hong Kong, Astec's approach to supply chain strategy in China has been to rely on partnering locally and to build long-term supplier relationships.

The company relies on vendor hubs and allowing vendors to manage inventory and provide local market intelligence. Astec involves its Asian partners in the product design, innovation and logistics process. To avoid compromising on quality, the company has created a supplier development program where 50 Astec engineers work with suppliers to continuously drive improvement. The company has also created an internal IT group that's focused exclusively on supply chain. "We've won millions of dollars in new business by investing in local supply chain professionals and in developing market intelligence, which most companies don't do," said George Foo, Astec executive vice president of operations.

Longitudes experts also point out that a key way to ensure better customer service is to deliver complete supply chain visibility. Visibility, of course, allows companies, customers and supply chain partners to look up and down the supply chain, to see exactly where an order is, where it's headed and why. No one can afford the risk of black holes of information anymore. On the other hand, a company can greatly enhance customer service by providing richer, more up-to-date information about shipments in progress.

Imagine a service that would give high-volume shippers detailed visibility into the status of multiple shipments. They can share this information electronically with their customers who can feed it into their own systems like inventory and accounts payable. Visibility tools like this can help companies provide instant answers to customer questions and to do a better job of troubleshooting if something goes wrong.

3. Differentiating from Competitors

When you understand the customer, you can gain a springboard to competitive advantage, believes Dr. Lee. He points to the Spanish apparel manufacturer, Zara, as a prime example of a firm that uses a holistic supply chain to differentiate its products in the fast-changing, highly competitive fashion marketplace. Zara has been growing 20 percent since the 1990s and the company's net profit margin is 10 percent. That compares to an apparel industry average of 3 to 4 percent.

The apparel maker's highly flexible, cross-functional supply chain allows it to introduce an incredible 12,000 new products a year. It changes stock every two to four weeks, rather than every season, by focusing on supply chain flexibility rather than finding the lowest labor cost.

Could that produce retail shortages? Zara doesn't worry about that. That's because shortages convey an image of scarcity and hot products. That prompts customers to buy now, and to return often to see what's new. In a nutshell, Zara has designed a supply chain that differentiates its products to match its particular business plan objective — to satisfy customers' ever-changing appetites for new styles.

The fashion manufacturer is willing to invest in information technology to achieve that alignment objective. That includes equipping retail store managers with personal digital assistant devices (PDAs). The managers continually monitor customer preferences and use the PDAs to electronically forward data on customer behavior to a central planning office. Design decisions are made only after incorporating the critical, up-to-the minute customer behavior data from the stores. The Zara supply chain is all about using the best information possible to achieve an advantage. Zara's flexibility also makes it well prepared to adapt quickly when unexpected events occur.

4. Improving Cash Position

Supply chain collaboration can also improve a company's cash position. The Hong Kong trading firm, Li & Fung, employs a network of 7,500 suppliers in more than 40 countries. For each product, Li & Fung dissects the entire supply chain and has each task performed by the supplier and in the country where it will be done best, fastest and at the lowest cost.

At Longitudes Shanghai, Dr. Victor Fung, chairman of Li & Fung, said a product that costs $1 when it leaves a factory will cost $4 by the time it reaches the consumer. The final price is $5 if it's made in China, where system inefficiencies add to the cost. He terms these non-production costs as the "soft $3 or $4."

The way to reduce these soft costs associated with supply chains is through a synchronized supply chain in which production can be postponed to take place later. This can be achieved because of short cycle times and because better estimates are available. That results in less obsolete inventory, fewer markdowns and lower soft costs.

To drive supply chain efficiency, Li & Fung dissects the supply chain into its basic components, which Dr. Fung calls "atomizing." Each task is performed by the supplier in the country where it's most efficient to do so. This means creating a global network where suppliers are tapped based on expertise, availability, quotas and cost.

For example, in producing an order of shirts, the yarn might come from a factory in South Korea; the dyeing and weaving might take place at two factories in Taiwan; and the cutting, making and trimming might happen in three factories in Thailand. Conventional wisdom to the contrary, in this collaborative, "atomized" supply chain, China often represents just 20 to 30 percent of the total value added. China is often the final step in assembly, but atomization has offered opportunity to each supplier to define where in the supply chain it will specialize. That means more opportunities for specialized small and midsize enterprises in all countries.

5. Boosting Productivity

Of course, increasing productivity is an ongoing C-level priority. And it's here that several Longitudes experts believe we've just scratched the surface when it comes to what supply chains can do. They believe that, to attain maximum productivity, supply chains must be synchronized outside — as well as within — the four walls of the company.

Said Moffat of IBM: "I look at parallels outside the IT industry. I look at the Wal-Marts and the Proctor & Gambles. They understand the supply chain has to expand beyond their four walls. It can no longer be [a matter of] how efficiently can they do something inside their walls. It's really, how do they span, how do they make it so their suppliers and retailers are more productive, so they can get that moment of truth for the customer."

As companies seek out ways to boost productivity, they'll increasingly focus on their core competencies. They'll leave supply chain design and execution to partners with the expertise, scale and resources to get all elements of the supply chain to operate in unison.

As a group, the Longitudes supply chain experts agreed that the supply chain had reached a point where it could make a significant difference on each of the five universal business challenges. They agree that the supply chain no longer should exist independently of business strategy. In an era of synchronized commerce, its purpose is to help the company achieve its business plan priorities.

The vision of synchronized commerce supports that priority. In a way, it's much like Henry Ford's original conveyor belt. Ford believed his manufacturing employees would work much faster, cheaper and more productively if they could perform specialized tasks along the conveyor belt. Today, workers in different countries do the very same using supply chain conveyor belts that extend around the globe.

The real payoff lies ahead. That will come when precision is brought to all these divisions of labor, when they're orchestrated in harmony among all suppliers and partners in the process, when they meet customer expectations at every point along the supply and demand cycle, when they work in perfect tandem with the business plan. Synchronized commerce is the supply chain fully come of age.